Using indifference curves approach, explain the conditions of con… - Vidyadip

Question

Using indifference curves approach, explain the conditions of consumer’s equilibrium.

✓

Answer

There are two conditions:

MRS = Ratio of prices.
MRS continuously falls.

Explanation:

Let the two-goods be X and Y. The first condition for consumer’s equilibrium is that MRS = Px/Py. Now suppose MRS is greater than Px/Py. It means that the consumer is willing to pay more for X than the price prevailing in the market. As a result the consumer buys more of X. This leads to fall in MRS. MRS continues to fall till it becomes equal to the ratio of prices and the equilibrium is established.
Unless MRS continuously falls, the equilibrium cannot be established.

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